ESG Investors Are Being Duped

The essential premise of so-called ESG funds is that your investments reflect your values. Unfortunately, if you genuinely prize social responsibility, protecting the environment and good corporate governance, it’s challenging to find a fund that reflects those principles entirely.

In fact, many such funds are packed with big names that have a minimally positive or even overall negative impact by any logical evaluation of environmental, social and governance standards, including the likes of Amazon, Microsoft, Alphabet, Facebook and J.P. Morgan.

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To be fair, those companies employ hundreds of thousands of people worldwide while steering clear of selling alcohol, tobacco and firearms. For the most part, they also tend to promote diversity and inclusion in their hiring practices. Still, these factors do very little to change the fact that none of those firms belong anywhere near an ESG fund.

Amazon, for instance, has a devastating carbon footprint and stifles small businesses around the globe. Meanwhile, it gets easier by the day to argue that Facebook’s toxic platform has wrought as much damage to society as any tobacco company.

To be sure, it’s no mystery why ESG funds include companies like this – to goose returns. Because of that, however, what you end up with is basically a stripped-down version of the S&P 500 – which, in the end, means that ESG is more of a cynical attempt at marketing than a genuine bid to foster socially responsible investing.

ESG OMISSIONS

A careful examination of which firms ESG indexes omit underscores this point. There is a range of companies making a huge, positive impact, by helping people lead safer, cleaner and more satisfying lives. Yet, many of them are nowhere to be found in most ESG funds.

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Consider the examples of Sunrun, which has a goal of putting affordable solar panels on every roof; SolarEdge, whose inverter system could become a revolutionary game-changer for energy usage; and NextEra, the global leader in wind and solar energy generation.

All three of these energy companies have seen their stock prices rise this year. But just as important, all have the potential to help mitigate the devastating impact of climate change. 

Another example of a stock that should be in ESG funds is Gilead Sciences. Granted, it’s taken a beating this year but has plenty of potential going forward, thanks to its role in developing treatments for a long line of diseases, including obesity, HIV, hepatitis C and cancer.

Of course, Gilead – and other firms like it – are easy targets since drug costs are high, but it’s hard to argue they haven’t had a net positive impact. Think about it: Many of the people who rely on their drugs are often the most marginalized and vulnerable in society.

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Other companies that help people improve their health also should have a home in ESG funds. This includes Peloton, which facilitates a healthy lifestyle, as well as Beyond Meat, whose plant-based foods are a key step to limiting the planet’s carbon footprint. 

SELECTIVE TARGETING

All of this is why it makes sense to build portfolios selectively, based on your beliefs and values first. Otherwise, you’ll fall prey to funds that reverse engineer their holdings to maximize returns.

To do this, consider whether a company’s actions demonstrate that it wants to have a positive impact on society. If this seems too subjective, ask yourself three easy questions about its products or services: 

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*Do they improve lives? 

*Do they improve living conditions? 

*Do they reduce waste? 

If the answer is ‘yes’ to any one of them, the next step is determining whether the company’s financial fundamentals and returns meet your performance and risk management requirements.

Is this approach more work than simply buying an ESG fund? Yes. But in conducting this type of selective targeting, you’ll come up with not only a starkly different set of investments than what is found in a typical ESG fund but one in which is far more likely to mirror your values and beliefs.

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Ross Gerber is CEO and President of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment advisor with approximately $1.5 billion in assets under management as of 12/15/2020. Gerber Kawasaki clients, firm and employees own positions in Google, Amazon, Apple, Microsoft, SolarEdge, Sunrun and Gilead. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation. Follow Twitter: @gerberkawasaki.

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